TMI Blog2006 (10) TMI 69X X X X Extracts X X X X X X X X Extracts X X X X ..... o different rates, i.e., 42,704 qtls. should be valued at Rs. 85,58,293 being the amount realised on sale up to November 30, 1978, which is after the closing of the previous year arid the balance from sugar of 28,789 qtls. should be valued at Rs. 207.86 per qtl. which was the cost price as on June 30, 1978, and thus adopting an altogether new principle which has got no sanctity in law and in accountancy ?" 2 The present reference relates to the assessment year 1979-80. 3 Briefly stated the facts giving rise to the present reference are as follows: 4 The assessee is a private limited company and derives income from manufacture and sale of sugar. The previous year of the assessee ended on tune 30, 1978. The only dispute in the case was regarding the valuation of dosing stock of free sale sugar. The assessee was having the following stock as on June 30, 1978 Levy sugar Free sugar 95,144 qtls. 71,493 qtls. 1,66,637 qtls. 5 There was no dispute regarding the valuation of levy sugar but the assessee disputed that the valuation of free sale sugar weighing 42,704 qtls. should be taken at the amount realised by the assessee till No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 207.86 per qtl. The Income-tax Officer, therefore, will determine the amount which can be substituted for the addition. As the addition has been sustained, the assessee's appeal is also decided with reference to the above facts." 7 From the above, it is dear that the Tribunal even though had accepted in principle that the net realisable value is a recognised principle for valuing the closing stock, yet it had applied the method of valuation adopted by the assessee in the previous years, i.e., 1974-75 to 1977-78. 8 The assessee being aggrieved with the said directions moved a miscellaneous application against the order dated May 15, 1987, referring paragraphs 18, 19 and 20 of Tribunal's order wherein the principle of valuation of closing stock, as urged by the assessee, was accepted in but while giving effect to the said principle, the Tribunal had committed an error with reference to the valuation of the free sale sugar. The Tribunal, after hearing the parties came to the conclusion that there was a patent mistake in the order of the Tribunal as it had accepted the argument of the assessee that the amount realised up to November 30, 1978, should be taken into consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TO v. Volkart Brothers [1971] 82 ITR 50 (SC) ; and (2) Biswanath Prasad and Sons v. CIT [2005] 277 ITR 265 (All). 11 On the merits he submitted that right from the assessment year 1974-75 till the assessment year 1977-78, i.e., the immediately preceding assessment year, the assessee had been valuing its closing stock on the basis of the cost price or market price, whichever is lower. In the assessment year 1977-78, the assessee had valued its closing stock on the same principle which became the opening stock for the assessment year 1978-79 and if the assessee is permitted to change the basis of valuation of the closing stock from the cost or market price, whichever is lower, to that of net realisable value, it would not reflect a true and correct picture of the profit and loss earned by the assessee inasmuch as in respect of part of the closing stock principle of net realisable value shall be adopted and for the remaining part the principle of cost or market price, whichever is lower, shall be adopted. Two principles for valuing the closing stock of the assessee cannot be adopted in a previous year and in any event the concept of net realisable value is based on estimate o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that while valuing the closing stock for the purpose of showing the true and fair state of the balance-sheet as well as computation of income, the concept of real income could not be ignored. The balance-sheet of the company should not be inflated. The balance-sheet must show the true and fair value on the date of the balance-sheet incorporating the facts on the date when the balance-sheet is being signed. This principle is supported by the guide lines issued by the Institute of Chartered Accountants of India for contingencies and events occurring after the balance-sheet date. The net realisable value will definitely show the correct figure because the sale has already been effected and the amount has been realised and that is the value for the closing stock. Standing counsel while arguing the case, cited the examples that if the principle adopted by the assessee is followed, it would create different anomalies for different asses- sees. Those assessees dealing in free and levy sugar having different previous years will value the closing stock at different rates which will defeat the interests of the Revenue. On the other hand, Dr. Vaish in the course of the argument cited an exa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value the closing stock as follows: Levy sugar 95,144 qtls. at Rs. 186.60 Free sugar 71,493 qtls. at Rs. 207.86 The Income-tax Officer, therefore, will determine the amount which can be substituted for the addition. As the addition has been sustained, the assessee's appeal is also decided with reference to the above fact." 14 From a reading of the aforesaid order, we find that the Tribunal had held the net realisable value for the purpose of valuing the closing stock to be not an incorrect method. However, it had not applied the said principle on the ground that the assessee from the assessment year 1974-75 till the assessment year 1977-78 was valuing the closing stock by applying the method of cost or market price, whichever is lower. The Tribunal has applied the same method during the year under appeal. Thus, the Tribunal on the basis of the fact and material on record after a detailed discussion had not applied the principle of net realisable value for valuing the closing stock and instead applied the principle of cost price and market price whichever is lower. In the order dated December 14, 1989, passed under section 254(2) of the Act, the Tribunal in paragraph 7 ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot value it at a different figure. This principle was also recognized by the Supreme Court in Chainrup Sampatram v. CIT [1953] 24 ITR 481 wherein the apex court had held that, this is the theory underlying the rule that the closing stock is to be valued at cost or market price, whichever is lower, and it is now generally accepted as an established rule of commercial practice and accountancy. 19 In the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44 the apex court has held that for computation of the true profits of the year in the case of a trade or adventure, each year being a self-contained unit, the value of the stock-in-trade at the beginning and at the end of the accounting year and by ascertaining the difference between them has to be taken into account. It has further held that it is a well recognized principle of commercial accounting to enter in the profit and loss account the value of the stock-in-trade at the beginning and at the end of the accounting year at cost or market price, whichever is lower. 20 In the case of United Commercial Bank v. CIT [1999] 240 ITR 355 the apex court has held that for valuing the closing stock, it is open ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
